THE IMPORTANCE OF FUNCTIONAL FORM IN THE ESTIMATION OF WELFARE

Researchers have recognized the central role that the choice of functional form has on estimated of consumer surplus. The purpose of this paper is to quantify the magnitude of errors which might arise from the use of incorrect functional forms. It describes a simulation experiment where estimated consumer surplus, based on simulated data sets, is compared with consumer surplus computed directly from the simulate data. The errors resulting from the use of mismatching functional forms range from approximately 4% to 107%.Institutional and Behavioral Economics, Research Methods/ Statistical Methods,

A Simulation Approach to Comparing Multiple Site Recreation Demand Models Using Chesapeake Bay Survey Data

To value water quality improvements in the Chesapeake Bay or elsewhere, it is necessary to choose an appropriate model of consumer behavior. A number of different travel cost based recreation demand models have been employed to value changes in water quality or beach access. Among the possible models to choose from are the typical trip model, the pooled observations approach, a varying parameter model, and a logit model. Each approach makes different assumptions about the structure of individual preferences and the choice process underlying individual decisions. The purpose of this paper is to implement a methodology that can be used to suggest a model (or models) appropriate for valuing quality improvements in the Chesapeake Bay. To compare these approaches, a series of outdoor recreation user populations is constructed by choosing a utility function, its parameter values and an error distribution. This information is combined with the characteristics of individuals and recreation sites from a Chesapeake Bay recreation demand survey to solve the individual's maximization problem. Each of the models is estimated using these data, and the compensating variation of a quality change is calculated. Benefit estimates are compared with simulated welfare change to evaluate the models.Community/Rural/Urban Development, Demand and Price Analysis, Environmental Economics and Policy, Research Methods/ Statistical Methods, Resource /Energy Economics and Policy,

Consequences of Co-Benefits for the Efficient Design of Carbon Sequestration Programs, The

In this paper, we study the social efficiency of private carbon markets that include trading in agricultural soil carbon sequestration when there are significant cobenefits (positive environmental externalities) associated with the practices that sequester carbon. Likewise, we investigate the efficiency of government run conservation programs that are designed to promote a broad array of environmental attributes (both carbon sequestration and its cobenefits) for the supply of carbon. Finally, policy design and efficiency issues associated with the potential interplay between a private carbon market and a government conservation program are studied. Empirical analyses for an area that represents a significant potential source of carbon sequestration and its associated cobenefits illustrate the magnitude and complexity of these issues in real world policy design.

Carbon Sequestration in Agriculture: an Offset Program versus Other Conservation Programs

In this paper, we study the social efficiency of private carbon markets that include trading in agricultural soil carbon sequestration when there are significant co-benefits (positive environmental externalities) associated with the practices that sequester carbon. Likewise, we investigate the efficiency of government run conservation programs that are designed to promote a broad array of environmental attributes (both carbon sequestration and its co-benefits) for the supply of carbon. Finally, policy design and efficiency issues associated with the potential interplay between a private carbon market and a government conservation program are studied. Empirical analyses for an area that represents a significant potential source of carbon sequestration and its associated co-benefits illustrate the magnitude and complexity of these issues in real world policy design.Environmental Economics and Policy,

Empirical Assessment of Baseline Conservation Tillage Adoption Rates and Soil Carbon Sequestration in the Upper Mississippi River Basin

The study proposes a methodology for developing a carbon sequestration baseline attributable to the current use of conservation tillage. An integral component of the methodology is the explicit acknowledgment that there is an uncertainty in the baseline because of the uncertainty associated with the use of econometrically estimated models. The results of applying the method to a major crop production area, the Upper Mississippi River Basin in the central United States, are reported for two major crops in the region, corn and soybeans. The approach to estimation of the baseline should be readily transferable to other geographic areas and conservation practices.Environmental Economics and Policy,

Multiple Benefits of Carbon-Friendly Agricultural Practices: Empirical Assessment of Conservation Tillage in Iowa

In this study, we estimate empirically the multiple benefits of a subsidy policy that would offer payments to farmers in return for the adoption of conservation tillage and compare the outcomes of alternative targeting designs for such a policy. Using data for roughly 12,000 National Resource Inventory (NRI) points, we simulate for the state of Iowa the least-cost policy schemes for offering payment incentives. We use an economic model of conservation tillage adoption to evaluate the costs of adoption, and we use a model that simulates physical processes (Environmental Policy Integrated Climate, or EPIC) to estimate the environmental benefits of adoption at each of the NRI points. We assess the costs and environmental consequences of two targeting options. The first is a practice-based policy instrument that maximizes the acres of land in conservation tillage, regardless of the level of environmental benefits achieved. The second is a performance-based instrument that yields the highest amount of environmental benefits per dollar spent. We consider four performance-based benefits: carbon sequestration in agricultural soils, reduction in nitrogen runoff, reduction of erosion of soil by wind, and reduction of erosion of soil by water. We find that the practice-based instrument provides high proportions of the four benefits relative to the performance-based instrument, especially at higher budget levels. Similarly, we estimate that targeting one of the four benefits provides high percentages of the other benefits compared to the amounts obtainable if they were targeted directly.conservation tillage, multiple benefits, subsidy policy, targeting.

Institutions and the Value of Nonpoint Source Measurement Technology: Carbon Sequestration in Agricultural Soils

The development of technologies for accurate field-scale carbon assessment allows the implementation of more efficient policies than can be implemented in their absence. We estimate the value of accurate measurement technology by estimating the gains from implementing a more efficient policy, one that targets carbon reductions at the field scale but requires accurate field-scale measurement technology, relative to a practice-based policy that can be implemented in the absence of such technology. We find large cost savings due to improved targeting of conservation tillage subsidies for the state of Iowa. The cost savings depend significantly on the choice of baseline carbon, while the ability of the government to cost discriminate has little impact on the value of accurate measurement technology.carbon sequestration, green payment policy, value of measurement technology.

Kuhn-Tucker Estimation of Recreation Demand – A Study of Temporal Stability

The paper examines the Kuhn Tucker model in the context of estimating recreation demand when the choice set it very large. It examines the temporal stability of parameter estimates using multiple years of data on trips to 127 lakes in Iowa made by households in Iowa. The study finds that for the given dataset, the estimates derived from a Kuhn-Tucker model are largely stable over time.Recreation demand, Kuhn-Tucker, Temporal Stability, Environmental Economics and Policy, C2, Q2,

Dynamic Willingness to Pay: An Empirical Specification and Test

In a static setting, willingness to pay for an environmental improvement is equal to compensating variation. However, in a dynamic setting characterized by uncertainty, irreversibility, and the potential for learning, willingness to pay may also contain an option value. In this paper, we incorporate the dynamic nature of the value formulation process into a study using a contingent valuation method, designed to measure the value local residents assign to a north-central Iowa lake. Our results show that willingness to pay is highly sensitive to the potential for future learning. Respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those who faced a now-or-never decision. The results suggest that welfare analysts should take care to accurately represent the potential for future learning.Clear Lake, contingent valuation, water quality, willingness to pay.